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Bankruptcy and Protecting Debtors From Employment Discrimination

Section 525 of the U.S. Bankruptcy Code prohibits employers from firing or otherwise discriminating against a person who “is or has been a debtor” in bankruptcy. This anti-discrimination provision of the Code is intended to further the goal of allowing debtors who have formally filed for bankruptcy to make a “fresh start.”

Scope of Protection

The prohibition against employment discrimination based on bankruptcy applies to both government employers and private employers, and is meant to protect the following categories of people:

  • An individual who is or has been a debtor
  • An individual who has been insolvent prior to the commencement of a bankruptcy case, or during a case before grant or denial of a discharge
  • An individual who has not paid a debt that is dischargeable in a bankruptcy case, or that has been discharged under the Bankruptcy Act

Intent to File Does Not Warrant Debtor Protection

The U.S. Court of Appeals for the Ninth Circuit has set forth a bright line rule for determining exactly which employees are protected by Section 525. Specifically, the court held that an employer who fires a debtor employee after learning of the debtor employee’s intent to file bankruptcy does not violate the Code. Rather, protection only extends to employees who have already filed for bankruptcy.

In the aforementioned case, the debtor was hospitalized and incurred substantial medical expenses at a hospital where he was also employed. The debtor was ultimately unable to pay off his debt and informed the hospital that he was planning to file for bankruptcy. Subsequently, the hospital fired the debtor. The court ruled that the debtor did not have a valid action against the hospital for unlawful termination under Section 525, because the Code’s protection extends only to an individual who “is or has been a debtor.” In this case, however, the hospital fired the debtor before the debtor filed for bankruptcy. As such, Section 525 did not apply.

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